Learnings & Applications: The U.S. Energy Market

Based on the United States Electricity Industry Primer — Department of Energy(PDF)

Power Market

Generation, transmission, and distribution make up the 3 essential components, with step-up and step-down substations between each. There are two primary generation markets:

• base-loading satisfies the minimum, near-constant demand and continuously operates in peak and non-peak hours
• peaking generation facilities come online to meet the peak demand, and usually have higher costs given the short-response nature of their operation. These are typically natural gas facilities.

The voltages at the various stages are roughly 5–34.5 kV for generation, 69–765 kV for transmission, and 15–34.5 kV for distribution. It appears that by cutting out the transmission phase, the voltages would be roughly equivalent between generation and distribution. Given the high cost of transformers (at the substations between each component), eliminating transmission in a closely-connected micro grid would save significant system costs. Power transformers range in price from roughly $2 million to $7.5 million.

Wholesale Electricity Markets connect electricity producers with Load Serving Entities (LSEs) and power marketers (who may resell the power again at a margin). The wholesale market is regulated by FERC and administered by ISOs and RTOs. Power market administrators sell the output from federally owned hydroelectric facilities.

Retail Electricity Markets connects LSEs with the end power users. All states regulate the price of electricity for end users, and certain states allow customers to choose their power suppliers (full retail competition).

Capacity Markets host the sale of electricity for future load reserves, as LSEs are required to have a reserve margin.

The majority of power consumption in the United States is residential, followed by commercial, industrial, and transportation, respectively. With the electrification of the transportation industry, I expect to see an increasingly energy-intensive transportation sector, as power will now be drawn from the grid to charge vehicles rather than being isolated via gas stations.

Market Regulators

The Federal Energy Regulatory Commission (FERC) is an independent regulatory committee responsible for regulating interstate transmission of electricity, reviewing M&A activity by electricity companies, and establishing financial reporting regulations. It does not regulate retail electricity sales or approve generation construction (it does handle siting applications for transmission projects, however). Projects within DIFEI must comply with FERC over transmission linkage, as well as regulations around corporate transactions in the ownership structure of individual projects.

The North American Electric Reliability Corporation (NERC) develops and enforces reliability standards for bulk power systems in the United States, with their authority coming from FERC. Projects in DIFEI must also comply with the NERC reliability standards. NERC also trains and certifies industry personnel, so DIFEI operators should search for “NERC certified” when applicable.

Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs) operate regional electricity grids, administer wholesale energy markets, and provide reliability planning to meet NERC requirements. RTOs perform each of these duties, but also have greater responsibility for the transmission network and ensure fair transmission access for all generation projects. In areas without an ISO or RTO, the local utility is responsible for transmission planning. Projects in the West and Southeast are more likely to encounter territories without an ISO/RTO.

State regulatory agencies have varying roles by market, but generally fall into two categories:

• State Public Service Commission regulates what are fair and reasonable rates for electric service under their jurisdiction
• State Department of Environmental Protection regulates the state’s air, land, and water resources/use

Utility Models

Within the scope of DIFEI, projects will initially focus on generating wholesale electricity to sell to utilities. Therefore, an evaluation of the different types of utility models is not particularly relevant, as each will simply be treated as the buying party in a PPA. DIFEI projects will operate as independent power producers without a responsibility for transmission (excluding linkages to the project) or distribution. In the future, large scale transmission projects (like HVDC lines) could be funded with DIFEI, but for the time being this research will focus on generation projects.

It is important to note that most Investor-Owned Utilities (IOUs) and Public Power Utilities (“Municipals”) have regulated retail power prices, which affect their PPA negotiations.

Compliance Road Map (Last updated 6/1)

• Generation Construction: NERC reliability standards, ISO/RTO for reliability planning
• Transmission Construction: FERC for siting applications, ISO/RTO for linkage or local utility
• Operation: NERC to ensure continued reliability, ISO/RTO for wholesale market sales, FERC for regulation of wholesale market sales, State Public Service Commission for pricing if directly selling to retail (DIFEI will most likely be dealing with the wholesale market)
• Project Ownership: FERC for corporation activity

If you have any comments, questions, or insights, we’d love to hear them! Comment below or send us an email | Follow The DIFEI Research Project to get regular updates about renewable energy, blockchain, and our research.